Why the market may not be impacted by the 2020 election: Ariel Investments Vice Chairman

Ariel Investments Vice Chairman Charlie Bobrinskoy joins the On the Move panel to discuss what Joe Biden's vice presidential pick Kamala Harris means for Wall Street.

Video Transcript

ADAM SHAPIRO: We're going to turn our attention--

- My privilege, thank you.

ADAM SHAPIRO: --to continue this discussion-- you're welcome, sir-- to continue this discussion about the impacts of this historic choice by Joe Biden with Charlie Bobrinskoy. He is Ariel Investments vice chairman and head of the Investment Group. And basically, before we talk in to how Wall Street is reacting, I've got to ask you specifically, what is the message we're getting from Wall Street about this choice?

CHARLIE BOBRINSKOY: I think it was well telegraphed before. Vice President Biden had said he would pick an African-American woman. So that narrowed it down pretty quickly. The two choices that people thought were possible were Senator Harris and former Secretary Rice. Of the two, I think Senator Harris was clearly the preferred person.

I think there's also a view on Wall Street that vices presidents and vice presidential candidates don't make a lot of difference. Maybe a little different here because of Vice President Biden's age. But frankly, I would say not a big surprise or a big reaction either way.

JULIE HYMAN: Charlie, more broadly-- it's Julie here. It's good to see you. More broadly, how much are you factoring in the election when you're looking at-- and I know you are a long-term person, right, when you're looking at your investment strategy. So how much are you factoring that in? How much are you trying to sort of game out the policy eventualities of either presidency?

CHARLIE BOBRINSKOY: Historically, it's been very hard to do that. If you recall back in 2016, the conventional wisdom was that a Trump election would be a disaster on Wall Street. The market would be down massively. In fact, if you remember that night, the futures were down 600 and then ended up recovering. And we had an extremely strong market after 2016.

In the opposite way, people were very nervous about an Obama administration. But we had a perf-- a very good record in the market after President Obama was elected. So it's just very hard to say these things.

I think the one thing that everybody does agree on is that 22% tax rates are better than 29% tax rates. It doesn't take a PhD in math to figure that out. That's a significant difference. And that wouldn't be great for the stock market if taxes on corporations went up.

But with that caveat-- by the way, I will say there's certain industries where you'd have to be careful. Senator Harris does not tend to think well of the not for the-- excuse me, for the for-profit education industry. There are some other industries in energy that probably the two of them are not supportive of.

But in broad terms, it's not been profitable to try to game the market by trying to decide who's going to win the election.

AKIKO FUJITA: Charlie, there's the question of what policy will look like in any one of these administrations, whether it's a second-- second term for President Trump or Joe Biden is president. And there's also the question about what kind of policies are going to be put forward to win the election? And I'm curious how you're seeing that election risk escalate, whether it's the president, for example, going tougher on China, whether there could be a miscalculation on that front, whether there are other policies that could be put forward with the president potentially continuing to fall behind in the polls. How do you calculate that risk as an investor going into November?

CHARLIE BOBRINSKOY: Yeah, well, actually, recently the polls and the betting markets have tightened a little bit. President Trump's chance of winning was in the low 30% range. And now it's come all the way up to the low 40s. The developments in some cities and violence around the country has actually been positive for the odds-makers in terms of his chance of being re-elected. So I would say it's tightened.

But the individual policies that you do have to worry about-- and this is, we're starting to see this in the bond market-- are just the massive deficit spending and the printing of money by the Fed for the very understandable and noble goal of softening the effects of the pandemic. We are running massive, massive deficits. We are seeing today with the inflation number that came out one of the worst inflation numbers we've had in 30 years. The risk of inflation is rising.

One month doesn't make an inflation trend. But I think three years from now, we could look back on this time and say we should have all seen inflation coming. And that has very significant implications for how we all invest.

ADAM SHAPIRO: Charlie, a lot of us are very worried about inflation, because we're old enough to remember when inflation really was a threat to the economy. And you've said avoid all long-term bonds. Rates will head up when we get to the other side of the pandemic.

What happens if that's wrong? Because inflation was not an issue, even after the Great Recession, with the great amount of debt and spending we were doing.

CHARLIE BOBRINSKOY: Yeah, but we've gone-- remember when the Great Recession ended in '08, '09, we had about $9 trillion of federal debt. Today we've got over $20 trillion. We've more than doubled the federal debt in the last 10 years, call it. And that's heading up at a accelerating rate.

And so so far, interest rates have been kept down because government bonds in a 10-year are considered a safe haven. They're a defensive strategy. And, of course, the Fed itself has been propping up the price of bonds by buying a lot of them themselves.

If we get to the other side of this-- which I believe we will. Sweden now has no deaths from coronavirus. The numbers have turned in a positive direction across the US. When we get to the other side of this, and we will, then I believe interest rates are going to go up. And they could go up a lot.

You combine that with inflation and they could go up even more. And all those things mean that it could get ugly in long-term bonds. Long-term bonds, including high-yield, have rallied all the way back to where they were before coronavirus. We've got unsustainable low interest rates. And things that are unsustainable tend to end.

ADAM SHAPIRO: On that note, we appreciate what you have to say, if we're a little worried about it. Charlie Bobrinskoy is Ariel Investments vice chairman, head of Investment Group. Thank you for being here "On the Move."